International shares for Australian retirees: why diversification beyond ASX matters

Australian retiree portfolios tend to be heavily concentrated in ASX-listed shares. The reasons are understandable: familiarity, dividend income, and the substantial financial benefit of refundable franking credits for retirees with low tax rates. For a retiree in pension phase superannuation — where earnings are taxed at zero — a fully franked Australian dividend effectively delivers around 1.9% of additional return on top of the cash dividend yield, through the refund of the attached imputation credit. That is a genuinely valuable advantage, and it rationally tilts portfolio construction toward Australian shares.

The problem is that the Australian Securities Exchange represents only about 2% of global stock market capitalisation. An Australian share portfolio is not a globally diversified share portfolio — it is a concentrated bet on a small market with specific sector characteristics. The ASX is heavily weighted toward banks, resources companies, and a small number of large industrials. What it lacks is meaningful exposure to the technology platforms, biotechnology companies, consumer brands, and other high-growth sectors that drive global equity returns. Over a retirement that might last 25 to 35 years, that concentration risk is worth taking seriously.

The franking credit trade-off

International shares do not carry Australian franking credits. Dividends from foreign companies are paid without imputation, which means there is no credit to refund against a low or zero Australian tax liability. This is the real cost of international diversification for Australian retirees, and it is not trivial — for a pension phase retiree whose Australian shares effectively deliver an extra 1 to 2 percent per year through franking refunds, shifting those assets to international equivalents sacrifices that return. Foreign tax credits — which apply where the company has paid tax in its home country — can offset some of the foreign withholding tax on dividends, but they do not replicate the full cash-refund advantage of Australian franking credits.

For retirees in pension phase super, the franking credit advantage strengthens the case for a meaningful Australian allocation. But it does not make the case for concentrating the entire portfolio in Australian shares. The risk reduction from international diversification — the smoother long-term return from holding a slice of every major economy rather than just the Australian one — has real value over a multi-decade retirement horizon, and the premium sacrifice is not total.

Currency exposure: a feature as much as a risk

International shares introduce currency exposure: when the Australian dollar strengthens, foreign shares are worth less in AUD terms, and vice versa. Many retirees instinctively treat this as a risk to be managed, but over a long investment horizon currency movements tend to be largely self-correcting. A weakening Australian dollar boosts the AUD value of international holdings; a strengthening dollar reduces it. For a retiree spending primarily in Australian dollars but holding a long-term investment portfolio, the currency exposure on the international portion is part of the diversification, not a pure downside.

International shares come in hedged and unhedged form. Hedged funds remove the currency exposure, tracking the underlying market performance in AUD without currency fluctuation. Unhedged funds retain the exposure. Many investors hold a mix — perhaps half hedged and half unhedged — which captures some currency benefit while moderating volatility. The right balance depends on individual circumstances, time horizon, and how much volatility a retiree finds manageable.

Access is simple and low-cost

Australian retirees have straightforward access to international equities through Australian-listed exchange-traded funds. A number of established funds — including Vanguard's VGS (global shares ex-Australia), iShares IVV (S&P 500), Vanguard VTS (US total market), and Vanguard VEU (all-world ex-US), among others — trade on the ASX in the same way as Australian shares. They are low-cost, broadly diversified, and do not require a foreign brokerage account. For retirees managing their own portfolio, or for SMSFs with a trustee-directed investment strategy, listed international ETFs are the simplest route to global diversification.

Allocation in practice

The right mix of Australian and international shares depends on the tax environment and the retiree's specific circumstances. For a retiree in full pension phase super with no personal income tax, the franking credit advantage of Australian shares is at its maximum, which supports a somewhat higher Australian allocation — perhaps 50 to 60 percent of the share component. For a retiree holding shares personally with some taxable income, the franking advantage is still present but slightly smaller, and a more even split — perhaps 50/50 — is reasonable. For large portfolios where the accumulation at risk from sector concentration is substantial, a tilt toward more international exposure makes sense.

A broadly workable starting point for most Australian retirees is somewhere in the range of 40 to 60 percent Australian and 40 to 60 percent international within the share portion of the portfolio. This range captures meaningful franking credit value while achieving genuine diversification across the global economy. For most retirees, the debate is not "Australian or international" but rather how to find the right balance between the two.

The concentration risk in context

It is worth naming the concentration risk plainly. A portfolio of Australian bank and resources shares has served many Australian retirees well over the past few decades. But it is not a globally diversified portfolio, and the conditions that have made it work — strong commodity demand, a stable banking sector, consistent dividend payments — are not guaranteed to persist. The technology sector transformation that has driven equity returns in the United States, Europe, and parts of Asia over the past 20 years has been largely absent from the ASX. Retirees who hold a globally diversified portfolio capture returns from wherever in the world they emerge, rather than depending on the specific outcomes of a small number of sectors in a small market.

Sources

• Refund of franking credits for individuals — ATO
• Imputation credit (glossary) — Moneysmart
• Retirement income and tax — Moneysmart
• Claiming a foreign income tax offset — ATO
• Exchange traded funds (ETFs) — Moneysmart
• Diversification — Moneysmart